BoG Governor Ernest Addison speaks to Graphic Business

As part of Graphic Talks 360, a Graphic Business webinar series, the Governor of Bank of Ghana, Dr Ernest Addison discussed the Mid-year review of the banking sector.

The webinar series which was moderated by the Graphic Business Editor, Mr Theophilus Yartey, sought to find answers to some of the banking sector’s policies amid the COVID-19 pandemic. These are excerpts of the interview with Dr Addison.

Theo Yartey: What is your appraisal of the size and impact of COVID-19 shock on the Ghanaian economy?

Dr Ernest Addison: In Ghana, we have made some poor economic decisions in the past. The Ghanaian economy was really very bad, it was almost stagnated. The initial economic indicators that we have looked at for the first quarter of the year came in relatively strongly. We do have some strong points and relatively weak points. When you look at private sector contribution to social security, you also get the sense of impact on employment in Ghana. We are projecting that we will see GDP growth decline from an original estimation of over seven  per cent to two per cent, a significant revision for the outlook on growth.

Theo Yartey: As a central banker, how do you feel being in charge of monetary policy implementation now and how is the feeling like?

Dr Ernest Addison: Three years ago, in 2017, the Ghanaian economy was growing at very slow rate at almost 3 per cent, inflation was high at about 5 per cent, the exchange rate was very unstable because we did not have a lot of reserves, and the Bank of Ghana had worked very hard over the past three years to correct these developments. You will notice that we have had a fiscal consolidation.

The government has had to spend less by trying to raise revenue and prioritise its expenditures. The Central bank has also had to tighten monetary policy and in a sense that has helped in bringing inflation down, and we have been able to build more reserves and we're seeing more stable conditions and higher growth.

Last year 2019, the growth rate was above 7 per cent. We can see inflation which was within our target band of 8 (plus or minus 2) per cent, has recently gone up to 10.6 per cent, and one can also see that the budget deficit is threatening to be wider than what we originally planned. It calls for very serious navigation in order to ensure we do not undermine all the gains we have made in the past three years.

Theo Yartey: How would you rate the banking sector’s pre pandemic strength, especially on the back of the cleanup exercise?

Dr Ernest Addison: It looked as if the sector knew something was in the pipeline, and so, they prepared for it. Over the past three years, the Central Bank has tried to strengthen the financial sector by getting rid of insolvent and weak institutions. We got rid of nine very weak banks that were not even able to meet their depositor withdrawals. Over the past three years, we have raised the depositor requirements for banks. As a result of this, the banks now have more capital.

The minimum capital requirements three years ago was 120 million which we raised to 400 million and you will see that since then all the banks are better capitalised as of the end of last year. We are seeing that the banks are growing more strongly and their asset growth has increased.

The banks are also beginning to give more credit and the total advances for these banks have also increased. The confidence of the banking sector has, however improved.  One of the observations on the banks has also been an increase in deposits to the banking system.

A lot of the weaker and smaller institutions have seen deposits go down, and people have diverted their deposits into institutions that are stronger and better managed. This is mostly to the advantage of the banks that are perceived to be stronger. In a sense, the banking system is entering the COVID-19 environment on a stronger foot. They are much better capitalised and they're more liquid.

We’re saying that the operational cost for banks since the COVID environment increased has gone up, at the same time, the net interest increase for banks has gone down. We’re beginning to see that impact of weaker revenue flow. Ultimately the banks are well organised to weather the COVID-19 effects provided it does not become protracted and unresolved within the next six months.

Theo Yartey: The BoG has adopted some measures to support the banking sector and the economy, how are the sector and the economy responding to these measures?

Dr Ernest Addison: I think that the economy is responding very well. The first policy decision that we took was to lower the policy rate from 16 per cent to 14.5 per cent. The COVID pandemic is an economic shock which impacts on aggregate demand, therefore, there is not much activity by way of demand in the economy.

By lowering the policy rate, you are able to stimulate a little bit more demand because the interest rate on investment, for example, goes down. Lowering the policy rate ideally leads to lower lending rates within the economy and that should help stimulate growth. We are seeing that the banks have also passed this on to their lending rates, and we have seen nearly 200 bases points in the lending rates by banks.

As I said, we have also asked the banks to give a moratorium to businesses that have been negatively impacted by the COVID pandemic. We have seen more 3000 customers of banks who have benefited from restructuring of their loans. At the same time, the banks have also implemented other policies such as reduction in reserve requirement for banks. We reduced the primary reserve requirements from 10 per cent to 8 per cent. This translates to about GH¢ 2 billion worth of money, which the banks are free to use to augment the lending that they are providing to the private sector, and I think that has also helped.

In addition to that, the BoG reduced capital conservation buffer of banks by 1.5 per cent,. And then we have also taken the precaution of preventing banks from the duty profits of 2019 in order to have the buffers to withstand the shock that are coming as a result of the COVID- 19.